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Policies in Relational Contracts

Daniel Barron and Michael Powell

American Economic Journal: Microeconomics, 2019, vol. 11, issue 2, 228-49

Abstract: We consider how a firm's policies constrain its relational contracts. A policy is a sequence of decisions made by a principal; each decision determines how agents' efforts affect their outputs. We consider surplus-maximizing policies in a flexible dynamic moral hazard problem between a principal and several agents with unrestricted vertical transfers and no commitment. If agents cannot coordinate to punish the principal following a deviation, then the principal might optimally implement dynamically inefficient, history-dependent policies to credibly reward high-performing agents. We develop conditions under which such backward-looking policies are surplus-maximizing and illustrate how they influence promotions, hiring, and performance.

JEL-codes: D21 D82 D86 M51 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mic.20170181
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